Thursday, August 16, 2007

State Supreme Courts Invalidate Waivers of Consumer Class Actions

This posting was written by Mark Engstrom, editor of CCH State Unfair Trade Practices Law, and John W. Arden.

Contractual provisions in wireless telephone service agreements could not operate to waive consumers’ rights to bring class actions against a wireless service provider, according to recent decisions issued by the Washington and Oklahoma Supreme Courts.

In both cases, a waiver of consumers’ rights to bring class actions against the provider was ruled unconscionable.

Substantive Unconscionability

In Scott v. Cingular Wireless, a class action waiver in an arbitration clause was held unconscionable because it effectively denied large numbers of consumers the protection of Washington’s Consumer Protection Act. The waiver also exculpated the wireless service provider from liability for an entire class of wrongful conduct.

The class action alleged that the service provider overcharged customers up to $45 a month by unlawfully adding roaming and hidden charges.

To the extent that the class action waiver barred Consumer Protection Act claims, it was a substantively unconscionable violation of Washington’s policy to protect the public and foster fair and honest competition, according to the Supreme Court.

Although the waiver did not expressly exculpate the service provider from anything (it merely channeled dispute resolution into individual arbitration or individual small claims court proceedings), it effectively exculpated the provider from legal liability for any wrong in which the cost of pursuit outweighed the potential amount of recovery.

Quoting Judge Richard Posner of the Seventh Circuit Court of Appeals, the Washington high court explained that the “realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30.”

Even the service provider’s promise to pay all filing, administrative, and other arbitration fees did not make it worthwhile to pursue small claims individually, in the court’s view. Because the class action waiver stated that the entire arbitration clause would be null and void if it were found to be unenforceable, there was no basis to compel arbitration. Accordingly, the case was reversed and remanded for further proceedings.

In Bilbrey v. Cingular Wireless, LLC, a customer was allowed to proceed with his class action claim under the Oklahoma Consumer Protection Act because the class action waiver in his wireless service contract was unconscionable for governing claims that arose from prior agreements, including agreements that involved the customer and the service provider’s predecessors in interest.

The customer alleged that the service provider violated the Consumer Protection Act by calculating the duration of incoming calls from the time a wireless channel was seized (just before the phone began to ring), rather than when the phone was answered. This practice was allegedly contrary to representations made to customers and resulted in overcharges.

Although the original service agreement (between the customer and a predecessor in interest) did not contain an arbitration clause, the service provider had induced the customer to sign a new contract, in exchange for a free phone, three months after the customer had filed suit.

Because the new agreement was signed after the customer’s Consumer Protection Act claim was filed, it had the effect of retroactively barring his active class claims, according to the Oklahoma Supreme Court.

Given the one-sided character of the clause, and the fact that it was unreasonably favorable to the service provider, the court concluded that the retroactive result was unconscionable. The lower court’s refusal to compel arbitration was upheld.